Will Bitcoin bounce back? Why 2022’s pain is different to anything previously

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key takeaways

  • Bitcoin Closed the Year Down 64%, Its Worst Year Since 2018
  • This bear market is different, as for the first time in bitcoin’s existence, the broader economy is also in retreat.
  • Bitcoin has a high correlation with the stock market, proving it trades like a high-risk asset
  • Fans are hoping that this link can be broken, but for now, it presents as a difficult macro climate for bitcoin and which has dragged its price down over the past year.

Cryptocurrency investors will be happy to close the book on 2022.

With the era of low interest rates, officially the era of cheap money, as the world transitioned to a new interest rate paradigm, the prices of entire asset classes fell. Risk assets got crushed, and there are few investments more on the risk spectrum than crypto.

looking at Bitcoin, the world’s leading cryptocurrency closed the year at $16,547, while it had entered the year at $46,311. This translates to a drop of 64%. But how bad was the performance historically, for an asset notorious for both explosive gains and bone-chilling losses?

2022 is the second worst year for bitcoin

Looking at annual returns since 2011, the first year when sufficient liquidity and price data were available, shows that bitcoin’s 64% drop this year was its second-worst number, after only 72% in 2018. The latter came after a run—up to $20,000 in late 2017, the first time bitcoin truly entered the mainstream consciousness.

In this context, the data suggests that 2022 may just be another year, isn’t it? Bitcoin has fallen many times before, and has always rebounded. Unfortunately, this time there’s a catch.

Bitcoin is facing recession for the first time

Satoshi Nakamoto published the bitcoin whitepaper in 2008, after the great financial crisis. Enclosed in the genesis block is a reference to the British newspaper The Times: “The Times 03/January/2009 Chancellor on brink of second bailout for banks”.

So Frist trading in 2009, bitcoin was propelled into this post-crisis environment, an environment of zero (or even negative) interest rates, a warm money printer and explosive returns in risk assets. A quick look at the returns of the stock market since the launch of bitcoin shows that until this year, things were running smoothly.

And so for the first time in its history, bitcoin is experiencing a pullback in the broader economy. The money printer has been shut down and interest rates have been raised, with the federal funds rate now at 4.25% – 4.5%.

This is very important because some bitcoin evangelists may argue that bitcoin trades as a high-risk asset. The price data proves this without a doubt, as its correlation with the S&P 500 skyrocketed – and only increased last year after it began raising interest rates in April 2022, as I wrote in this pieceand is shown on the graph below.

The previous bear market is not the same

This is why extrapolating past bear market bouncebacks to bitcoin is naive. The world is a different place now than at any other time in the history of bitcoin. The free money-only market can’t last forever, and now is the time for bitcoin to show the world what it’s made of.

Bitcoin is often compared to gold, but the shiny metal has proven over a long period of time that it can be considered a hedge and a coveted store of value through which investors can preserve their assets. Plotting the returns of gold historically clearly shows that it tends to rise in times of uncertainty. This is the kind of chart you want to see entering a bearish market.

Unfortunately, bitcoin has had to date traded with an extremely high correlation with the stock market. Over time, advocates hope this link will be broken. That’s up for debate, but what’s certain right now is that bitcoin is about as far from a “hedge” as possible.

If the Federal Reserve softens and reduces interest rate hikes, you can be sure asset prices will bounce again – and those further along the risk-on spectrum, like tech stocks and bitcoin, will be among the big winners. Will be from

In the longer term, the trillion-dollar question is whether this correlation can be broken and whether bitcoin can achieve its coveted store of value status.

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